Courtesy of Ron Rutherford, Sabrient Systems and Gradient Analytics
The most recent ISM manufacturing report has left much to be pessimistic about, not that the markets or the media seemed to notice.
First, the headline PMI dropped below 50 (marginally to 49.7) with a drop of 3.8, indicating contraction in the manufacturing sector for the first time since July 2009. It also missed the consensus by 2.3 and was outside the consensus range from Econoday.
Second, new orders dropped a surprising -12.3% to end also up in negative territory at 47.8%.
Third, exports also dropped into negative territory by 6% to 47.5%. This is troubling as it was one possible avenue for increased aggregate demand, although it was expected because of the weakness in China and the financial crisis in Europe.
Fourthly, the most important indicators showed weakness in production, down 4.6% to 51%; employment, down slightly to 56.6%; inventories, down 2% to 44%; and a backlog of orders, down 2.5% to 44.5%.
Lastly, even the price index’s fall is not much solace considering its dramatic drop of 10.5% to a low of 37%. This was the lowest reading since April 2009 when the reading was 32%. The most recent high was February 2012 at a high of 61.5% which signifies a drop in the index of 24.5% over a 5-month period. Price volatility of inputs creates even more uncertainty in various markets.
Price drops could indicate overall weakness in the aggregate demand functions, actually leading to decreases in input demands, and making long term planning for commodities and extraction businesses more difficult. And, of course, this all could increase the likelihood that deflation will appear soon. The only commodities going up in price are Natural Gas and Guar (gum), but commodities with dropping prices numbered 14. This lop-sided skewness of the numbers is also evident in the percentage of respondents reporting higher versus lower prices, at 7% and 33% respectively. Normally, it would be tilted more toward rising prices to reflect the base-line inflation levels.
All this could be just an anomaly, especially the drop in new orders, but Markit’s PMI and the ISM non-manufacturing report (NMI) both showed a downward trend in business activity that is and soon will be approaching the contraction/expansion inflection point of 50. The PMI slid 1.5% to 52.5%, and NMI dropped 1.6% to 52.1%, which was below
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